Like other marital assets, an interest in a closely-held business must be valued as a part of the divorce case. Having handled many matters that required the valuation and division of closely-held business interests, our attorneys utilize their expertise, creativity and skill to create a problem-solving environment in matters in which a closely-held business interest is a part of the marital estate.
Experience has taught us that when a business is involved, both parties are best served when they choose one of the settlement processes—negotiation, mediation, or Collaborative Law—to address their priorities. By choosing a settlement process rather than litigating in court, the parties can mutually agree to a whole range of solutions that are beyond a court’s statute-based, limited cookie-cutter options.
Differing Views on Value
A less-involved spouse may see the business as a valuable asset that could be sold to generate cash for both parties. The owner-spouse may see the business as primarily having value as a means of generating a stream of income; if sold it would no longer fund on-going family living expenses. There may also be an emotional attachment due to the hard work and sacrifice involved in establishing a profitable business. Finally, the owner-spouse may also be concerned about being hit twice in the divorce process – once by having to pay support based on income from the business, and again by having to buy out the other spouse’s interest in the business.
Valuing a business can be complicated and costly, and nearly always requires the skills of an expert in business valuation. There are three basic valuation approaches: income, asset, and market. The experience and judgment of the expert determines the best approach. Often, more than one approach is used, and a range of value is determined.
Factors considered include:
- The owner’s “personal” goodwill, which is not a marital asset. This has significant value when the income approach is used.
- How and when the business was created. If the business was established prior to the marriage, or was inherited by one spouse, this will affect whether some or all of the value of the business is non-marital property.
- Taxes. Tax issues are often raised when one party plans to buy out the other party’s interest in the business and when the business will be restructured.
In a recent case, the owner-spouse wanted to be able to maintain ownership of the business, both to continue to support himself and to be able to pass the business along one day to the parties’ children. For her part, the Wife wanted to be able to go back to school and obtain an advanced degree in order to be able to make a career change. Both parties’ goals were achieved by a creative, negotiated resolution which involved a modest lump sum payment and then a buyout of the Wife’s remaining interest through payments over ten years, supported by a promissory note secured by the assets of the business. The amount of the agreed-upon payments was affordable due to the profits of the business and the Wife had ample financial support to pay for her tuition and living costs until her career change enabled her to become self-supporting.